Taxes and income, facts on inequality

Wall St Journal short video.

Do Taxes deter innovation?

Superstar inventors, those in the top 1% of patent production (weighted by patent citations), leave higher-tax countries in favor of lower-tax countries.

For instance, if the average country decreased the top tax rates by 10 percentage points, it would be able to keep 1 percent more of its domestic superstar inventors and attract 26 percent more foreign superstar inventors.

Origin based vs. destination based taxes

Follow up to Greg Mankiw article on taxes:

ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. If we change to a destination based taxation (where it is consumed instead of produced), this would encourage US exports and discourage imports. But then the exchange rates would adjust:

...Americans would supply fewer dollars in foreign-exchange markets, and foreigners would demand more dollars. As a result, the dollar would appreciate, making foreign goods cheaper for Americans, and American goods more expensive for foreigners. The movement in the exchange rate would offset the initial impact on imports and exports.

If the exchange rate adjusted completely, the so called "border tax" would become equivalent to a Value-added tax, with all the attendant benefits:  low rates over a broad base (non distortionary, i.e., people would not spend lots of effort trying to avoid it), and shifts taxes to consumption rather than income (encourages production/income).

Best selling textbook author describes principles for tax reform

In a NY Times article, Greg Mankiw demonstrates the ability that has made him a best-selling-econ-textbook author by simplifying a confusing debate down to four principles:

• WORLDWIDE VS. TERRITORIAL: Most nations aim to impose taxes on economic activity that takes place within their borders 
•  INCOME VS. CONSUMPTION: Many economists have argued that taxes should be levied based on consumption rather than income. 
•  ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. 
•  DEBT VS. EQUITY: Now, firms can deduct interest payments to bondholders, but they cannot deduct dividend payments to equity holders.

Mankiw thinks that Congress is moving in the right direction in all four dimensions.  

The Marginal Oil Producer Happens to be in Kansas

The Planet Money team recently set out to see who sets the price of oil. They found out that it was not some financial speculator or an arab sheik. Instead, the price is set by the cost of production at the most expensive well still operating.

So here is what sets the price of oil. You take all the oil people are buying today. Start at the end of the spectrum, where oil is cheapest to produce, and work your way up until you've satisfied all that demand. That last barrel you need, the most expensive one someone is willing to buy, that's the one that sets the global price for oil. If you're looking for someone who is setting the price, you look for someone who is just about to turn an oil well off or on.

In their case, they had bought oil from a Kansas pastor named Jason Bruns who had just decided to shut down a well on his property.

Will bundled payments change health?

CMS is changing the way that Medicare and Medicaid pay providers:

The CMS announced a proposal last week to put three new episodes of care under mandatory experiments with bundled payments, potentially compelling hundreds of additional hospitals into becoming financially accountable for what happens to Medicare patients long after they leave the hospital. 

In theory this is supposed to align hospital incentives more closely to the health goals of a patient.

“All those involved in healthcare have always wanted the best for their patients. Providers now have a greater amount of skin in the game and risk in the outcome.”

What could go wrong?

Why do we spend so much on health care?

Its the incentives, stupid!  The Atlantic has a nice summary of the problem.

Ten days after my father’s death, the hospital sent my mother a copy of the bill for his five-week stay: $636,687.75. ... but why should my mother care? Her share of the bill was only $992; the balance, undoubtedly at some huge discount, was paid by Medicare.

And what about President Obama's Affordable Care Act?

Like its predecessors, the Obama administration treats additional government funding as a solution to unaffordable health care, rather than its cause. The current reform will likely expand our government’s already massive role in health-care decision-making—all just to continue the illusion that someone else is paying for our care.

A better solution would limit the government's role to catastrophic insurance:

...a threshold of $50,000 or more ... (Chronic conditions with expected annual costs above some lower threshold would also be covered.) ... But the real key would be to restrict the coverage to true catastrophes—if this approach is to work, only a minority of us should ever be beneficiaries.

But what about poor people who cannot afford catastrophic insurance?

...the government should fill the gap—in some cases, providing all the funding. ... If we abolished Medicaid, we could spend the same money to make a roughly $3,000 HSA contribution and a $2,000 catastrophic-premium payment for 60 million Americans every year. That’s a $12,000 annual HSA plus catastrophic coverage for a low-income family of four. Do we really believe most of them wouldn’t be better off?

Why have re-admission rates fallen? (answers)

Based on comments to our earlier post about re-admission rates falling, I think I know know the answer:

1.  re-defining "admission" as "observation": Many Medicare patients are placed under “observation status’’ when they arrive at a hospital. That means they are considered outpatients and are not formally admitted, even if they are given a bed.  As a result, “the ratio of observation use to inpatient stays per 1,000 beneficiaries increased by 94 percent.” (link here)


2.  Hospitals are offering (better?) alternatives to hospital re-admission, e.g.,

"...we created a triage clinic--essentially a "walk-in" clinic for our patient population to be seen with any urgent issue after discharge. This has cut down on both ED visits and re-admissions."

Why have re-admission rates fallen?

The Affordable Care Act ("Obama care") began imposing penalties, and it seems as if hospitals have responded.  Mother Jones is skeptical about the results, as this would represent an almost perfect response to the ACA penalties:

the chart is almost too perfect. For four years the readmission rate is dead stable. Then, in a single month between December 2010 and January 2011 it suddenly drops by a full percentage point, and continues dropping for two years. This decline started about eight months after the passage of Obamacare, and it's hard to believe that hospitals could react that quickly. 

Then, the very instant that penalties begin for high readmission rates, everything stabilizes again. Apparently America's hospitals unanimously decided that once they'd hit a certain level, that was good enough and they wouldn't bother trying to improve even more.

I can think of several explanations, e.g., it may be that:

• Hospitals are refusing admission to particularly sick patients, likely to get re-admitted; 
• Patients are getting re-admitted to other hospitals; 
• Hospitals are giving patients prophylactic antibiotics,  which reduces re-admits, but also creates new antibiotic-resistant superbugs.  
• Hospitals are steering them to clinics and outpatient services, (the "good" outcome).

I would love to hear from former students (pls post in comment section) as to what they think is causing the change.  

Can money buy happiness?

Here is what I take away from this summary:

• There is a strong positive correlation between money and happiness.  

• However, it is not clear that the correlation is causal.  It could be, for example, that healthy people living meaningful lives are both happier and wealthier than others.  These "other factors" could be causing the correlation.

• If the correlation is causal (from money to happiness), then money has diminishing marginal returns to happiness.  This has a clear implication for giving:

Giving money to someone living on $1,000 per year in the developing world will do far more to improve their lives than giving $1,000 to someone earning $25,000. The correlations above suggest that it’s about 25 times more valuable. If you want to help people, this is a major reason to focus on international poverty rather than helping the relatively poor in richer countries.

Why is Finland is giving every adult $10,000/year?

To replace its cumbersome, costly, and bureaucratic welfare system:

The government thinks that the move will actually save money. Finland's welfare system is very complex and expensive to run, and the government hopes that simplifying it could reduce costly bureaucracy. 

It also argues that the change may encourage more people to look for work. About 9.5% of Finns are currently out of work -- the highest rate in more than a decade -- and the government believes some people are deterred from working because they're better off on unemployment benefit than accepting a minimum wage job.

HT:  Charles

Puzzle: why are marketers ignoring old people?

From a British blog,

A milestone in marketing stupidity has been reached. According to a September report by the U.S. Bureau of Labor, a majority of consumer spending (51%) is now done by people over 50. These people are the target for 10% of marketing activity. On the other hand, marketers spend five times as much money marketing to Millennials, the moronic obsession of every marketer on the planet.

 However, as an economist I dont buy the non-rational explanation offered:

There is no logic to the advertising industry's disregard for people over 50. It is marketing by selfie-stick - narcissism disguised as strategy.

Remember these are averages, and how much to spend on marketing is an extent decision, where the marginal effect of advertising is relevant.  It could be that the marginal benefit to advertising to young people is higher (they buy more in response to ads) or that the marginal cost of reaching them is lower, e.g., because they spend more time online.

For cigarettes, I know that new smokers switch more frequently between brands while established smokers are more loyal to a particular brand.  This may indicate more susceptibility to brand advertising, which rationally explain the high level of advertising aimed at young smokers.

I don't know what the answer is.  Would love those with more experience to weigh in.

HT:  High Lantern Group

Question: what happens when you reduce punishment?

Answer:  Crime increases

In this case, we are talking about major league pitchers deliberately throwing at batters, called "Hit By Pitcher" or HBP.  In 1994, the HBP rate exploded.  Why?

Before 1994, if a pitcher deliberately hit a batter, the batter's team would retaliate.

After 1994, the rules changed to a "warning-then-eject" rule.  Once the “warning-then-eject” rule was implemented, teams effectively got a free HBP, with no fear of retaliation. Team A hits team B, then both teams get warned and team B can’t retaliate without automatically losing their pitcher and manager! They de-incentivized retaliations to such a degree that they actually incentivized the first HBP.

Article summarizing the history of the HBP rule and with nice graphs of the HBP data: 
http://www.hardballtimes.com/the-hbp-explosion-that-almost-nobody-seems-to-have-noticed/

HT:  Eric E.

Socialism, really?

With a presidential candidate calling himself a socialist and suggesting we emulate Denmark, I want to do a little bubble bursting.  From past blog posts mentioning Denmark.  (The last one on the Scandanavian Model is the most interesting to me.)

2007: High earners flee Denmark utopia

2008: Obama proposes marginal tax rates of 53%

2010:  Denmark: high taxes, big social safety net, but all the talent has left the country

2013: What happens when you tax the hardworking, and subsidize the needy?

2013: The Scandinavian Model

What's the marginal incentive to commit murder in Taiwan?

In Taiwan, "hit to kill" or "double hit" cases have been common for decades.  For example,

A 2008 television report features security camera footage of a dusty white Passat reversing at high speed and smashing into a 64-year-old grandmother. The Passat’s back wheels bounce up over her head and body. The driver, Zhao Xiao Cheng, stops the car for a moment then hits the gas, causing his front wheels to roll over the woman. Then Zhao shifts into drive, wheels grinding the woman into the pavement. Zhao is not done. Twice more he shifts back and forth between drive and reverse, each time thudding over the grandmother’s body. He then speeds away from her corpse.

This phenomenon is caused by the incentives facing a driver:

In China the compensation for killing a victim in a traffic accident is relatively small—amounts typically range from $30,000 to $50,000—and once payment is made, the matter is over. By contrast, paying for lifetime care for a disabled survivor can run into the millions.

In other words, once you hit a pedestrian, the marginal benefit of killing the pedestrian is positive.

What happens when you raise tax on only some types of tobacco?

In 2009, the Federal government increased tax rates on roll-your-own tobacco, relative to pipe tobacco; and on small cigars, relative to large cigars.  What happened?

Monthly sales of pipe tobacco increased from approximately 240,000 pounds in January 2009 to over 3 million pounds in September 2011, while roll-your-own tobacco dropped from about 2 million pounds to 315,000 pounds. 

HT:  GAO, who also have a video on how to make cigarettes from pipe tobacco:

If you subsidize religion, you get more of it

When the state of Israel was founded in 1948, Premier David Ben-Gurion granted yeshiva students state financing and exemption from army service to rebuild Torah scholarship that was destroyed in the Holocaust (NY Times).  At the time, there were only 400 students who qualified for the subsidy.  


Today, they make up 10% of the population, and half of them live below the poverty line, dependent on subsidies to survive.   Rabbi Amsellem, a member of parliament, is telling them to go to work:

“Torah is the most important thing in the world,” Rabbi Amsellem said in an interview. But now more than 60 percent of ultra-Orthodox men in Israel do not work, compared with 15 percent in the general population, and he argued that full-time, state-financed study should be reserved for great scholars destined to become rabbis or religious judges. 

“Those who are not that way inclined,” he said, “should go out and earn a living.” 

Because the subsidies are tied to the number of children each family has, the problem is likely to get bigger.  Fertility rates among the ultra orthodox (7.6 children/woman) are several times higher than the general population.

Why do long-term hospitals discharge Medicare patients 23 days after surgery?

Because they get paid an extra 79% (as a lump sum) for doing so:

Under Medicare rules, long-term acute-care hospitals like Kindred’s typically receive smaller payments for what is considered a short stay, until a patient hits a threshold. After that threshold, payment jumps to a lump sum meant to cover the full course of long-term treatment. 

Since the marginal revenue for a patient who has reached the threshold length-of-stay falls to zero, most hospitals wait until the threshold has been reached, receive the lump sum, and then discharge the patient.  

The Journal analysis of claims Medicare paid from 2008 through 2013 found long-term hospitals discharged 25% of patients during the three days after crossing thresholds for higher, lump-sum payments. That is five times as many patients as were released the three days before the thresholds.

Kudos to the WSJ for doing some data mining to back up their stories.  

So to all my medical friends and students who still think that economics doesn't explain much about medical care, re-read chapter one, or re-watch the video, to re-familiarize yourself with rational, self-interested behavior.

REPOST: America's top chef uses marginal analysis

America's top chef uses marginal analysis

Alinea, which opened in 2005, was named the best restaurant in America by Gourmet Magazine in 2006. The restaurant's co-founder and head chef, Grant Achatz, said his 23-course meal is motivated by what any econ student would recognize as marginal analysis:

So there's something that we call the law of diminishing returns in our cooking. That's why the steak is only two ounces, because by your fifth bite you're really, you're done. You're done with that steak. You know what it's going to taste like. The actual flavor starts to deaden on the palate.

If we were to make you take 10 more bites, by the time you got to bite 15, the steak's just not that compelling anymore. So if we have a series of 23 small courses, where it's a burst of flavor on the palate, and then you move on to something completely different and then completely different, that helps us set up a more exciting meal, and it's something that is easier to kind of be compelled to go through a 23-course menu.

Getting Mechanic Performance Pay to Work Better

C. Kirabo Jackson and Henry S. Schneider have an interesting new paper, "Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay." Mechanics work on commission but do not seem to be pointing out to the customer all of the repairs that could be done. In the experiment, management provided auto mechanics with checklists of possible repairs to be filled out when a customer arrived so that possible additional repairs were not overlooked. The checklists worked - repairs and mechanic performance pay both increased. This was quite profitable for the firm. However, the additional repairs increased the mechanics' hours to the point that, when the three-week experiment ended, the mechanics abandoned using the checklists. The extra income was not worth their time.

This suggests two possible solutions for the employer to keep mechanics using the checklists. They could simply require checklists be used and monitor compliance. Or they could cut into the profits and increase the mechanics' commission rate to make it worth their while.